Iowa Governor Strikes Deal on Tax Cuts, Federal Conformity

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By Michael J. Bologna

Iowa Gov. Kim Reynolds (R) struck an agreement with Republican leaders in the House and Senate April 27 on a tax reform and federal conformity measure that will grant almost $400 million in relief to individuals and businesses next year.

Full details of the tax package and a responsive budget bill for fiscal year 2019 weren’t released, but a joint statement from Reynolds and the legislative leaders pointed to an agreement to collapse income tax brackets and reduce rates, leaving taxpayers with an average tax cut of almost 10 percent.

On the individual side, the compromise proposal collapses the current nine-bracket scheme to four, and drops the top bracket from 8.98 percent to 6.5 percent by 2023. Meanwhile, the top corporate rate would be cut from 12 percent to 9.8 percent. The changes are expected to provide $398 million in income tax relief in 2019, but higher levels of annual relief as the scheme is implemented over six years.

“This historic state-level tax reform—coupled with tax reform at the federal level—will bring significant relief to working-class Iowans in a fiscally responsible fashion that will allow the state to meet its budget responsibilities in the future,” Reynolds said in a statement. “These tax cuts are meaningful to Iowans making tough decisions about what they can and cannot afford. I commend the Iowa House and Senate for sharing in my priority of putting Iowans first.”

Democrats criticized Republicans for pursuing a tax-cutting agenda and a stripped-down budget at a time when state revenue is essentially flat. Reynolds presented her own tax proposal Feb. 13, and Republicans in the Senate championed Senate File 2383, which passed the chamber Feb. 28.

Sen. Joe Bolkcom (D), ranking member of the Senate Budget Committee, said the state should be making investments in fiscal stability and job-creation rather than “tax breaks for big corporations.”

With Republicans holding majorities in both legislative chambers, however, the compromise measure is expected to find quick acceptance in the House and the Senate.

Federal Conformity

The agreement seeks other substantive changes to the state tax code, including substantial conformity with the 2017 federal tax act ( Pub. L. No. 115-97) and elimination of the state deduction for federal taxes paid. Iowa is one of only six states with such a deduction: Alabama, Louisiana, Missouri, Montana, and Oregon are the others.

Reynolds pointed to provisions benefiting farmers and small business owners. The plan boosts the IRC Section 179 deduction for purchases of certain assets. The proposed tax code change raises the deduction to $70,000 for 2018, $100,000 for 2019, and $1 million for 2020 and beyond.

The agreement provides additional relief through modifications to the Qualified Business Income (QBI) deduction. Business owners would immediately be able to claim 25 percent of the new federal QBI deduction from taxable income, but the deduction would ramp up to 50 percent for 2021, 75 percent for 2022, and 100 percent for 2023 and beyond if triggered.

Online Retailers

One of Reynolds’ priorities is online sales tax collection, although it’s unclear if her previous proposals made it into the compromise package.

Reynolds previously called for the adoption of South Dakota’s economic nexus standard, which requires remote sellers without a physical presence in the state to collect tax when annual in-state sales exceed $100,000 or 200 separate transactions. The U.S. Supreme Court heard oral argument in South Dakota v. Wayfair, a case centered around that law, April 17. A decision is expected by late June.

Reynolds has also proposed adopting the marketplace provider standard adopted last year in Minnesota. Under this regime, e-commerce giants such as Amazon.com Inc., eBay Inc., and Etsy Inc. would be required to collect and remit tax on transactions by third-party sellers that move merchandise over their platforms. Washington state, Pennsylvania, and Rhode Island also enacted marketplace-provider regimes in 2017. Amazon has announced its agreement to collect in Washington and Pennsylvania.

In addition to Oklahoma, Alabama also enacted similar legislation this year. And a handful of other states have pending marketplace measures—including Hawaii, Kansas, and Washington.

The compromise plan comes more than a week after lawmakers blew a self-imposed deadline for enacting a state budget and closing out the spring legislative session. Members of the House and the Senate had hoped to conclude their session April 17, but disagreements over the scope of the anticipated tax cuts and state spending forced lawmakers into overtime negotiations with Reynolds.

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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